Nvidia Wipes Nearly $25 Billion From Its Market Cap After Earnings Day Disaster

Nvidia shares dropped by nearly 20% on Friday.

Nvidia (NVDA) stock slumped to its lowest level in over a year after its single worst day in a decade.

Shares tumbled 18.8% on Friday, finishing the day at $164.43 per share, down from a $202.39 close on Thursday.

Crypto Cracks Credibility

The drop in Nvidia's stock reflects, in part, the reaction of a market blindsided by results after CEO Jensen Huang's comments during the company's second-quarter earnings call that downplayed crypto's impact on the company.

"Last quarter [CEO Jensen Huang] said 'we are masters at managing our channel', which turned out not be the case," Bernstein analyst Stacy Rasgon told Real Money. "Management credibility definitely took a hit after this quarter."

"We came into Q3 with excess channel inventory post the crypto hangover," Huang told analysts on Thursday night. "The pricing took longer than we expected, and the volume increase took longer than we expected...I'm hopeful that now that pricing has stabilized, that customers will come back and buy."

That hope was not enough to satisfy analysts.

"The large shortfall in guidance due to a bloated channel due to crypto-currency is in sharp contrast to the comments around channel inventory from the company at the last earnings call," BMO Capital Markets analyst Ambrish Srivastava wrote on Thursday night. "Our estimates and target price are going lower."

Srivastava maintained his "Hold" rating and set a $175 price target for the stock; that's down from $225 prior to the earnings call.

The trouble in crypto and the "hangover" it brings may last for multiple quarters as well.

"The implication of their commentary is that a larger portion of demand in late 2017/early 2018 was for crypto than they had initially indicated, and that an end to the crypto bubble caused a channel refill which overshot," Morgan Stanley analyst Joseph Moore wrote. "As a result, in the January quarter, the company will literally ship almost no Pascal product into the channel, to allow inventory to clear."

The inventory has been largely built up by the cryptocurrency bust that has motivated a burgeoning second-hand market for Pascal gaming chips, which make up one-third of the overall gaming business for Nvidia.

The drop of cryptocurrency prices to lower and lower levels has made the purchase of mining chips, such as Nvidia's Pascal chips, unprofitable. As such, cryptocurrency miners have taken to selling chips second hand, flooding the market and pressuring prices for producers downward.

"We do see the next two quarters as artificially depressed, given the significant clearance of Pascal inventory, but the steepness of the snap-back is dependent on sell-through of the new Turing chips, where in the short term we are less optimistic than management," Morgan Stanley's Moore said.

The weak results and forecast of rough sailing ahead has prompted some tempered estimates from analysts covering the stock.

All 12 analysts polled by FactSet following the earnings release have reined in their targets after the surprise miss on the quarter. For example, the estimate from Jefferies was reeled in by a hefty $74, from $320 to $246 per share.

Bulls Build Weakness Buying Case

"Despite the near-term softness, our view on NVDA's secular drivers in Gaming and Data center is unchanged and we see continued growth in 2020 even with tough comps as the impact of cryptocurrency fully unwinds," JPMorgan analyst Harlan Sur said in his assessment of the company's earnings results. "We remain overweight NVDA and would be buyers on weakness."

Data center revenues were a significant bright spot amid a rough quarter for the chipmaker, recording revenue improvement of 58% year over year.

"We remain positive on NVIDIA's secular growth drivers and see a pullback in shares as a solid entry point for investors," Sur concluded, accounting for the underlying stories in the non-gaming segments.

He set a $245 price target for December 2019 based on his rebound expectations.

Longer term, the stock could run higher based on its positioning in terms of secular shifts in computing.

"The 20% revenue miss notwithstanding, we continue to view NVDA as a top play on our '4th Tectonic Shift in Computing Thesis'," Jefferies analyst Mark Lipacis wrote in a note Friday.

Lipacis set forth the argument that parallel processing workloads such as neural networking, gaming, as well as blockchain and cryptocurrency are only becoming a larger part of computing processing cycles. He termed this transition to parallel processing, meaning processes split into parts that execute simultaneously on different processors attached to the same computer, a "tectonic shift."

"NVDA is uniquely positioned to benefit from this tectonic shift due to its leading position as a supplier of a parallel processing platform," he declared.

He set a $246 price target for the stock based on his bullish outlook, maintain a "Buy" rating and top pick status.

The bullish outlook for such a shift echoes the work of the Action Alerts Plus team, which recently exited its position on the stock's October strength.

"We still love the long-term story here and we will add the stock to the Bullpen and will look to re-enter a position should the headwinds abate and the stock falls to a lower price," Jim Cramer's team wrote on October 15. "While the long-term thesis still holds, we cannot let ourselves become greedy and lose sight of the challenges that will face the industry."

That exit, at a price point $100 from Friday's close, proved to be a fortuitous one.

Timing is Everything

The question of a re-entry point remains as it may take some time for the stock to bottom.

Real Money technical analyst Bruce Kamich suggested that the stock still has more room to fall before it reaches its bottom.

"A large gap to the downside is likely and the $180-$190 area is now likely to act as resistance," he wrote in his technical analysis column. "Prices could hold around $160, but the $120-$100 area is where I would anticipate prices to reach in the weeks ahead."

It will also likely take multiple quarters for the inventory issues cited in the call to sort out. Of course, for long-term investors looking at a secular shift, these down quarters could provide an attractive price point.

Timing that price point will be the key.

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